‘Goldilocks’ scheme lures wealth managers

Insch Capital Management, a currency portfolio manager based in Lugano, Switzerland, has launched a structured product. While that may not sound out of the ordinary, chief executive Chris Cruden thinks it will be.

He is hoping the new product, “Goldilocks”, will displace funds of hedge funds from the portfolios of family offices and very rich investors. So far, it is looking good in terms of interest from wealth managers. However, this may be related more to dissatisfaction with hedge funds than to the merits of the Goldilocks offering.

Mr Cruden has discovered many wealth managers are in the sticky position of having clients who are unwilling to listen to them, particularly if they ring up with suggestions for investing in new funds of hedge funds or similar products that let their investors down in a crisis.

With a structured product investing in gold, (a hot asset at the moment), Mr Cruden says the wealth managers are finding their clients much more receptive.

The product is even designed with deliberately low fees to pique investors’ interest and discourage competitors, especially investment banks.

“We want to get a headstart on this – we want to build an industry,” he says.

Goldilocks (which Mr Cruden says is not too hot, not too cold, just right) is described as a gold note with currency enhancements. Four-fifths of the money is allocated to buying gold notes, structured so that investors will get full capital protection on that part of their assets. They will also get any gains in the price of gold up to 120 per cent over the five years of the product.

The remaining 20 per cent of the principal is invested in Insch’s currency programme with four times leverage.

While this level of leverage (borrowing three times the original to invest alongside it) seems risky, there is a “stop-loss” mechanism that automatically cuts in if the currency programme looks like it might lose more than half its original value.

This means the investor is guaranteed, at the end of the five years, to get back at least the 80 per cent of their capital that went into the gold notes and half of the remaining 20 per cent, adding up to a 90 per cent guarantee.

Management fees are an annual 0.5 per cent of assets, and there is a performance fee of 20 per cent on the currency segment of the product.

This combination of complexity of structure and rigidity of asset allocation does not sound all that attractive, but, according to Mr Cruden, it has gained the interest of a wider group of investors than he had expected.

The attraction is that “what you’re getting is a basic definition of your upside and the downside is protected”.

However, he could offer no theoretical basis for the specific asset allocation. Why did Insch design such a product? “Because people will buy it like this,” he says.